Is Skidelsky right? Should Greece leave Eurozone? - The Best from Greece

Posted on: 25/Nov/2011

Professor Robert Skidelsky, in his article published on New Europe’s website, has articulated a strong argument against the current economic wisdom, which is favouring policy measures that depress aggregate demand.

He rightly argues that, in this way, the certain outcome will be less growth or even a recession, without any benefit for public finance, since lower GNP will lead to even less tax incomes for state budgets and ever increasing public deficits.

Instead, Skidelsky proposes lower taxation for low incomes, which will immediately translate into higher consumption demand and more growth. He takes the example of Greece, where for some years now severe fiscal austerity policies have not only led to a deep recession, but also have not led to any noticeable reductions in state-budget deficits.

When it comes to the Eurozone, however, he insists that further measures to increase aggregate demand will work in the long run only if all member states have a current account surplus or no persistent deficits.

According to Skidelsky: “In the long run, the Eurozone must be recognised as a failed experiment. It should be reconstituted with far fewer members, including only countries that do not run persistent current-account deficits. Everything else that has been proposed to save the Eurozone in its current form – a central treasury, a monetary authority that does more than target inflation, fiscal harmonisation, a new treaty – is a political pipe dream.”

If this is so, we might perhaps have expected that many years ago, or even centuries ago, some US regions and even entire states would have abandoned the us dollar zone, just because they ran persistent current-account deficits.

It is the same for much smaller countries –Greece, with its entire territory having used the same monetary unit for two hundred years now, should have seen some of its backward regions that were importing more than they were exporting to have left the country and stopped sharing the same currency with other, more advanced regions.

In reality, what we observed was that those regions were abandoned by their population because there were no jobs, exactly because those regions imported more than they exported, and thus in the long run ended up exporting their own people. The same is true in the US, where the regions and states that create jobs and consequently are able to export more than they import, attract more people from regions with deficit current accounts.

If Greece did not have a grave state budget deficit and sovereign-debt problem, some Greeks would have simply gone to other Eurozone countries in search of jobs, due to the negative balance of job creation and extinction in the country. Actually, this is what we all predicted when Greece and other countries with deficit current accounts joined the Eurozone.

Unfortunately, the credit crisis and the over-indebtedness of the governments in question got first there, and drove people out of the regions in search for jobs elsewhere, before the current account deficits did the same or both factors working in parallel towards the same direction. This phenomenon has already acquired important dimensions among young polyglot people with university degrees, of which there are hundreds of thousands without employment in Greece, Portugal and Spain, but not Italy. The latter country may be over-indebted, but it has a strong industrial export-oriented base and its large current account is usually balanced.

So, we disagree with Professor Skidelsky when he advises the break-up of the Eurozone and its reconstitution with fewer countries with all and each of them running positive or balanced current accounts. Deficits of this kind in today's Eurozone seventeen members will only drive some regions to export their own people, to make up for the gap, but the monetary union will have no problem whatsoever in this respect, if its overall exports are equal or exceed imports.

source: http://www.neurope.eu/article/skidelsky-right-should-greece-leave-eurozone

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